Grace Period Microfinance Contract
RCTReview
Small initial differences in capital investment driven by loan flexibility can lead to substantial divergences in business size and profits over multi-year horizons through persistent profit reinvestment and compounding.
Picture this
Think of two snowballs rolled down a hill: one starts slightly bigger because it was packed with more snow at the top. As both snowballs roll for three full years, the slightly bigger one accumulates dramatically more snow because every extra layer adds even more surface area to pick up new snow.
What the evidence says
An initial investment differential of 6.0% (Rs 383.9) compounded over 36 months at a net monthly return differential of 2.0% (6.0% vs 4.0%) produces a Rs 23,000 capital stock gap, matching the observed Rs 23,600 empirical difference at endline [1, 2].
- Who was studied
- 766 microfinance clients tracked nearly three years post-disbursement in Kolkata, India.
- How
- Longitudinal capital stock simulation and empirical measurement comparing initial loan investment gaps (Rs 383.9) with long-run capital stock differentials (Rs 23,600).
What to do
Evaluate microcredit flexibility interventions using multi-year follow-up horizons to capture full intertemporal compounding effects on microenterprise capital.
From the source
"A simple accounting exercise verifies that these differences, though large, are consistent with a return differential of 2 percent per month... generated by the initial difference in investment behavior followed by compounding of these returns over the next three years."
101_290 microfinance and entrepreneurship AER2013.pdf